BILL ANALYSIS �
AB 236
Page A
Date of Hearing: January 9, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 236 (Swanson) - As Amended: January 5, 2012
VOTE ONLY
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income taxes: credits: qualified employees
SUMMARY : Expands and modifies the existing hiring credit for
small businesses. Specifically, this bill :
1)Allows, for taxable years beginning on or after January 1,
2012, an expanded $5,000 credit for each net increase in
"qualified full-time employees" hired during the taxable year
by a qualified employer. For purposes of this expanded
credit, a "qualified full-time employee" is defined as an
individual who meets the criteria for the existing hiring
credit and who has been unemployed for 12 or more consecutive
months prior to being hired.
2)Deletes duplicative sections of the Revenue and Taxation Code
as a housekeeping matter.
3)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Allows various tax credits designed to provide tax relief for
taxpayers who incur certain expenses or to influence behavior,
including business practices.
2)Provides for the following geographically targeted economic
development areas (G-TEDAs): Enterprise Zones, Manufacturing
Enhancement Areas, Targeted Tax Areas, and Local Agency
Military Base Recovery Areas. Special tax incentives are
provided to taxpayers conducting business activities within a
G-TEDA. These incentives include a hiring credit equal to a
percentage of wages paid to qualified employees.
3)Allows a credit for taxable years beginning on or after
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January 1, 2009, to qualified employers equal to $3,000 for
each net increase in qualified full-time employees hired
during the taxable year. The credit is limited to small
businesses (i.e., taxpayers with 20 or fewer employees as of
the last day of the preceding taxable year). The credit is
capped at roughly $400 million for all taxable years.
FISCAL EFFECT : Unknown
COMMENTS :
1)The author has provided the following statement in support of
this bill:
"By providing employment opportunities for individuals who are
most in need, including persons who have been unemployed for
one year or longer, AB 236 provides a simple answer to a very
complex problem.
"During this severe economic downturn, the tax incentive
provided in AB 236 could be a decisive factor in keeping some
small businesses open.
"The chronically unemployed become reliant on the ever
decreasing safety net to support themselves and their
families. The $5,000 tax incentive provided in AB 236 will
greatly benefit small businesses and will positively impact
the state bottom-line."
2)Committee Staff Comments:
a) What is a "Tax Expenditure"? : Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960s, United
States Treasury officials began arguing that these features
of the tax law should be referred to as "expenditures,"
since they are generally enacted to accomplish some
governmental purpose and there is a determinable cost
associated with each (in the form of foregone revenues).
This bill would modify an existing tax expenditure program,
in an effort to encourage the hiring of the chronically
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unemployed.
b) How is a Tax Expenditure Different from a Direct
Expenditure? : As the Department of Finance notes in its
annual Tax Expenditure Report, there are several key
differences between tax expenditures and direct
expenditures. First, tax expenditures are reviewed less
frequently than direct expenditures once they are put in
place. This can offer taxpayers greater certainty, but it
can also result in tax expenditures remaining a part of the
tax code without demonstrating any public benefit. Second,
there is generally no control over the amount of revenue
losses associated with any given tax expenditure.<1>
Finally, it should also be noted that, once enacted, it
generally takes a two-thirds vote to rescind an existing
tax expenditure absent a sunset date. This effectively
results in a "one-way ratchet" whereby tax expenditures can
be conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy, without a supermajority
vote.
c) Do Job Creation Tax Credits Actually Produce Jobs? :
With the national unemployment rate hovering around 9%,
some have advocated job creation tax credits as a means of
revitalizing the struggling economy. The question,
however, is whether such credits actually work. Recently,
Daniel Wilson, assistant director of the Center for the
Study of Innovation and Productivity at the Federal Reserve
Bank of San Francisco, attempted to answer this question.
In a paper co-authored with Robert Chirinko of the
University of Illinois at Chicago, Wilson examined the
period between January 1990 and August 2009, and found
that, among states where employers could qualify for
credits immediately after enactment of the credit
legislation, there was a slight employment increase of
0.12%. These findings would suggest that hiring credits,
at least at the state level, are a blunt tool for
stimulating job growth.
d) How Would this Bill Effect the Existing Small Business
Hiring Credit Program? : The Franchise Tax Board reports
that, as of December 3, 2011, 12,903 personal income tax
--------------------------
<1> This is not so in the case of the existing small business
hiring credit, which is capped at roughly $400 million for all
taxable years.
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and business entity returns had been filed, with cumulative
hiring credits totaling only $76 million. At this rate, it
could take several years for the existing $400 million cap
to be reached absent significant growth in the economy. By
providing an expanded credit for certain disadvantaged
employees, this bill could accelerate usage of the existing
credit allocation, thereby providing greater short-term
benefits.
e) Policy and Implementation Concerns : Committee staff has
identified the following policy and implementation
concerns. Committee staff is available to work with the
author's office to resolve these and other concerns that
may be identified.
i) This bill would provide an expanded credit of $5,000
to encourage the hiring of chronically unemployed
individuals. At the same time, the current $3,000 credit
for each net increase in qualified full-time employees
would remain in place. To prevent potential "double
dipping," amendments should be taken to clarify that
taxpayers are limited to either the $3,000 regular credit
or the $5,000 augmented credit for each net increase in
employees.
ii) This bill fails to specify a timeframe for
determining an employee's status as unemployed. Without
such a timeframe, an employee that was unemployed for 12
consecutive months 10 years ago could qualify the
taxpayer for the expanded credit. The author could
potentially address this issue by modifying the
definition of a "qualified employee" to include only
those individuals unemployed for 12 consecutive months
immediately prior to being hired.
iii) This bill references Revenue and Taxation Code
(R&TC) sections that have been renumbered. For example,
all references to R&TC Section 17276 should be deleted
and replaced with R&TC section 17276.20.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
AB 236
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Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098